Is Contribution To Provident Fund Under New Pension Scheme By Central Govt. Taxable ?
January 11, 2009 by taxworry · 6 Comments
I joined in central govt. department in January, 2008, I am considered in New Pension Scheme in which 10% contribution deducted every month from my salary and 10% is of Govt. Contribution.My question is that Our Account Officer is deducting Income tax on the money of New Pension Scheme (the total amount for this year is around Rs. 70,000). As govt. decision on income tax saving is Rs. 1,00, 000/-, by this what amount I will save as Rs. 70,000/- already saved in New Pension scheme the the remaining amount is Rs. 30,000/- I have to save in one year.Then what benefit we got in Income Tax saving as my total salary is under income tax, please inform me, the correct.Dr. Gaurav Sharma, Jodhpur
Section 80CCD of the I T Act deals with the new pension scheme applicable for employee joining the central government or other employer on or after January 1 , 2004. The said provision states 1. Deposit by employee up to 10 % of his salary (Basic+D.A) is allowed deduction u/s 80CCD Refer section 80CCD.(1) “Where an assessee, being an individual employed by the Central Government or any other employer] on or after the 1st day of January, 2004, has in the previous year paid or deposited any amount in his account under a pension scheme notified or as may be notified by the Central Government, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited as does not exceed ten per cent of his salary in the previous year.” 2. Contribution by Employer to account of employee is also allowed deduction u/s 80CCD. Refer section 80CCD(2) “Where, in the case of an assessee referred to in sub-section (1), the Central Government or any other employer makes any contribution to his account referred to in that sub-section, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the Central Government or any other employer] as does not exceed ten per cent of his salary in the previous year.” It means that if a person’s contribution up to 10 % of Salary is Rs 40,000 in a year, and central govt. also contributes Rs 40,000 to his account , the total deduction available is Rs 80,000. 3. Aggregate deduction u/s 80C and 80CCD and 80CCC can not exceed Rs 1,00,000 in a year. This means , if Rs 80,000 is deposited (as in aforesaid example) and Rs 40,000 in LIC , the employee can not get deduction of Rs 1,20,000, but he will be allowed maximum deduction of Rs 1,00,000 only. What about taxation of contribution of Govt to employees account? The contribution by government to employees’ account up to 10 % of his salary is not taxable in the year of contribution . However , when the assessee withdraws from the pension fund or closes his account, whole of the amount received on closure . Refer section80CCD(3) “Where any amount standing to the credit of the assessee in his account referred to in sub-section (1), in respect of which a deduction has been allowed under that sub-section or sub-section (2), together with the amount accrued thereon, if any, is received by the assessee or his nominee, in whole or in part, in any previous year, (a) on account of closure or his opting out of the pension scheme referred to in sub-section (1); or (b) as pension received from the annuity plan purchased or taken on such closure or opting out, the whole of the amount referred to in clause (a) or clause (b) shall be deemed to be the income of the assessee or his nominee, as the case may be, in the previous year in which such amount is received, and shall accordingly be charged to tax as income of that previous year.”
Therefore, if your accounts officer is treating the contribution by government as taxable in the year in which the contribution is being made, he is absolutely wrong. Let him read CBDT Circular No 9 /2008 [F.No 275 /192/2008-IT(B) dated 29/09/2008 page number 15 which states as under
“Any contribution made, in excess of 10%, by the Central Government or any other employer to the account of the employee under the New Pension Scheme as notified vide Notification No. F.N. 5/7/2003- ECB&PR dated 22.12.2003(enclosed as Annexure-VA) and referred to in section 80CCD (para 5.4(C) of this Circular) shall also be included in the salary income.”
Respected Sir,
In this regard ,You are requested to kindly have a look on new clause included in section 17(1)(viii),which clearly state that employer’s contribution to Notified pension scheme is fully taxable in the hands of the employee.
So ,in light of above clause ,DDO is correct ,and employer’s contribution is fully taxable.
Thanks
It is true that the contribution by govt. employer is inserted with in definition of Salary u/s 17 and also section 7(3) deems the contribution by employer “as received” , however the CBDT circular No 9 /2008 [F.No 275 /192/2008-IT(B) dated 29/09/2008 states as under (see page 15 of the Circular )
"Any contribution made, in excess of 10%, by
the Central Government or any other employer to the account of
the employee under the New Pension Scheme as notified vide
Notification No. F.N. 5/7/2003- ECB&PR dated 22.12.2003(enclosed
as Annexure-VA) and referred to in section 80CCD (para 5.4(C) of
this Circular) shall also be included in the salary income."
In this regard it is also required to be mentioned that pension is fully taxable and also withdrawl from such pension is fully taxable to the exetnt that even Principal amounts are made taxable.
Which means that the govt contribution restricted to 10 % shall be doubley taxed which can not be the intention.
I feel that any contribution exceeding 10 % has to be made taxable as per section 17.
Keep commenting like this .
Readers like you are GEM to my blog.
taxworry
Dear Sir,
Circular 9/2008 is only a compilation of earlier circulars,rules, Act and new rules can not be framed from this Circular which is contrary to specific provision given in the act.So I think the wording given in the 9/2008 is a compilation mistake.
Sir,As you may remember that I am serving as DDO in PSU ,In our organisation interesting debate(clash)was on between us(DDO) and New employees, on the same issue (NPS)and they had manage a clarification from ITO that the contribution in NPS by employer is not taxable .we are contributing 10% as employer in NPS .But later on ,on our objection ,ITO has withdrawn his clarification.and we have deducted the tax on the new employee after adding employer’s contribution in NPS .
So now union has also agreed with our views and send a demand to ministry Of Finance to amend the Act/Rules in this regard.In our organisation all most 2000 employee are effected with this condition.
It has been judically held that CIRCULR is binding on Revenue Authorities evenif the same may be contraray to what Act says.
The circular for TDS on salary gives a benefit to employees, then it should be applied even if in your judgment same is issued with a mistake.
Following Rulings of court should be followed in this regard
(1) Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 (SC) wherein it has been held as under:-
“It is clear that a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act under section 5(8) of the Act. This circular pointed out to all the officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision.”
(2) Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC) in which Apex Court referring to the notification dated 1-2-1942 wherein CBDT issued instructions to assessing authorities laying down the principles to be applied in assessing foreign shipping companies. The said notification did not refer to any development rebate as there was no provision for development rebate at that time. It was held that the fact that the proviso to section 10(2)(vib) of 1922 Act was incorporated into the Act after the Board issued its instructions cannot affect the force of the instructions issued by the Board of Revenue.
(3) K.P. Varghese v. ITO [1981] 131 ITR 597 (SC) wherein it is held that the CBDT Circulars, apart from being binding on the revenue authorities are clearly in the nature of contemporaneous exposition furnishing legitimate aid in the construction of sub-section (2) of section 52. The rule of construction by reference to contemporaneous exposition is a well established rule for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous. It is worth noting that Circulars issued by the CBDT are legally binding on the revenue and this binding character attaches to the aforesaid two Circulars dated 7-7-1964 and 14-1-1974, even if they be found not in accordance with the correct interpretation of sub-section (2) and they depart or deviate from such construction. Navnit Lal C. Jhaveri’s case (supra) and Ellerman Lines Ltd.’s case (supra) relied on.
(4) Keshavji Ravji & Co. v. CIT [1999] 183 ITR 12 (SC) wherein it has been held as under :-
“The Board cannot preempt a judicial interpretation of the scope and ambit of a provision of the Act by issuing circulars on the subject. This is too obvious a proposition to require any argument for it. A circular cannot even impose on the taxpayer a burden higher than what the Act itself, on a true interpretation envisages. The task of interpretation of the laws is the exclusive domain of the Courts. The Tribunal, much less the High Court, is an authority under the Act. The circulars do not bind them. But the benefits of such circulars to assessees have been held to be permissible even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. But that is not the same thing as saying that such circulars would either have a binding effect in the interpretation of the provision itself or that the Tribunal and the High Court are supposed to interpret the law in the light of the circular. There is, however, the support of certain judicial observations for the view that such circulars constitute external aids to construction.”
(5) UCO Bank v. CIT [1999] 237 ITR 889 (SC) wherein it is held that CBDT has power, inter alia, to issue circulars to tone down the rigour of the law and ensure fair enforcement of its provisions; so long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income-tax Act.
(6) Commissioner of Customs v. Indian Oil Corporation Ltd. [2004] 267 ITR 272 (SC) wherein following the decision of Apex Court in the case of CCE v. Dhiren Chemical Industries [2002] 254 ITR 554 it has been held that when a circular issued under section 151A of the Customs Act remains in operation, the revenue is bound by it and cannot be allowed to plead that it is not valid or that it is contrary to the terms of the statute. Although a circular is not binding on a Court or an assessee, it is not open to the revenue to raise a contention contrary to a binding circular. A show cause notice and demand contrary to existing circulars of the Central Board of Excise and Customs are ab initio bad. Further, it is not open to the revenue to advance an argument or file an appeal contrary to the circular.
(7) ITO v. Bir Engg. Works [2005] 94 ITD 164 (Asr.) (SB) wherein it has been held as under :-
“Instructions issued by the CBDT prescribing monetary limit for filing the appeals before the Tribunal, High Court or the Supreme Court are binding on the Income-tax authorities and therefore Tribunal did not commit any error in dismissing the Department’s appeal by relying on Instruction No. 1979, dated 27-3-2000.
Helo Mr. Rajan Gupta,
Section 17(1) (viii) reads
[(viii) the contribution made by the Central Government 75[or any other employer] in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD
Now I have a simple question, why in this statement 80CCD is referred, because 80CCD do not provides definations of pension schemes.
As far as I read this statement I can only say that initially government meant that you can take 80CCD deduction only when same is accounted as your income, therefoe the statement. The circular 9 provides additional relief where it is not accounted as income but still one can take that as deduction.
Dear Guest
I want to say that the contribution to new pension scheme by the employer is taxable in hand of employees.
Further such employer contribution is also eligible for deduction u/s 80CCD.
Moreover in new salary circular 1/2010 has clarified the issue that the above two statement given above are correct